The reason is that China has announced that its long-awaited cotton auction will take place in the second half of the month. Cotton stocks are at all-time record highs – enough to make 3 pairs of jeans for everyone in the world – following the disastrous impact of stimulus policies, and China currently holds 11 million tonnes in store.
A lot is hanging on this auction, which will also tell us whether President Xi Jinping has now taken full charge of economic policy:
- Last year, an auction was announced for 1 million tonnes, but prices were set so high that only 63kt was sold
- The problem was resistance from an army-owned company, Xinjiang Production and Construction Corps
- It produces around 30% of China’s cotton, and opposed policies that would reduce its income by lowering prices
- It is also an important employer in Xinjiang province, accounting for 17% of its GDP
- But recently, as I noted in January, there have been signs that Xi is determined to make progress on the issue
This will have important implications for the polyester chain, as the chart above confirms.
Retailers vary their blends of polyester/cotton depending on relative prices, and the oil price fall has helped to support PTA/polyester demand in recent months. But as we note in the new “Demand – the New Direction for Profit” Study, China now also has enough PTA capacity to supply total world demand. So lower prices on cotton will likely lead to major price pressure on polyester, and across the textile chain.
In turn, this will pressure commodity markets more generally.
China’s New Normal policies have burst the commodities bubble created by policymaker stimulus. There has been a brief respite in recent weeks, as hedge funds realised the central banks were about to panic, once again. They knew the stimulus policies weren’t working, and that more free cash would soon become available. Oil prices jumped 50% as a result, along with other commodities.
But China is the real key to the outlook, as it has been since Xi became President in 2013. His most logical policy is to take the pain of restructuring this year. He can then move towards reappointment in 2017 by stressing that he has dealt with the problems he inherited, and can promise a better future ahead.
The outcome of the cotton auctions will be a key indicator for the global economic outlook for the rest of 2016.